Housing Starts Unchanged in June

WASHINGTON – Construction of new homes and apartments showed no change in June following a decline the month before, a possible sign that the red-hot housing market is starting to cool off.

The Commerce Department (search) reported that builders broke ground on 2 million new homes and apartments in June at a seasonally adjusted annual rate, exactly the same pace as in May.

The unchanged performance in June was far below the 1.1 percent increase that private economists had been expecting and analysts noted that the performance in May was revised down to show a decline of 1.1 percent instead of the small increase that had been previously reported.

The flattening out of building activity was seen by analysts as a possible indication that the booming housing market might finally be starting to cool.

Such a development would be welcome news for those who had begun to worry that the country was developing a dangerous housing bubble (search) similar to the speculative bubble that developed in the stock market in the late 1990s.

But economists said they did not expect any precipitous drop in housing activity, given that mortgage rates, which have started to rise, still remain at extremely attractive levels.

"Housing activity will remain robust in the next few months thanks to lean inventories, strong economic growth and mortgage rates that are close to a 40-year low," said Nariman Behravesh, chief economist at Global Insight, a forecasting firm in Lexington, Mass.

He said that while housing is at or close to a peak, any weakening in activity for the rest of this year would be modest.

Ian Shepherdson, chief economist at High Frequency Economics, another forecasting firm, said he did not expect housing activity to show a significant decline until "there is a meaningful, sustained rise in mortgage rates."

Federal Reserve (search) Chairman Alan Greenspan (search) has argued that it would be hard for a national housing bubble to develop, but he has expressed concern about "froth" in the hottest local housing markets, where home prices have been rising at double-digit rates.

He has also worried about the more exotic mortgages people have been using to buy homes, mostly interest-only loans that could leave them exposed if home prices suddenly began falling, leaving them with a mortgage that cost more than the value of their home.

For June, construction of single-family homes fell by 2.5 percent to an annual rate of 1.67 million units. However, this was offset by a 14.2 percent rise in construction of apartments which rose to an annual rate of 337,000 units.

On a regional basis, the strength in June occurred in the South, where construction rose by 11.4 percent to an annual rate of 1 million units.

Construction was down in all other parts of the country last month, led by a 12.1 percent decline in the Midwest to an annual rate of 335,000 units. Construction in the West dropped by 10.4 percent to an annual rate of 481,000 units and was down 0.5 percent to an annual rate of 185,000 units in the Northeast.

Even with these declines in housing starts, economists expect records will be set for the fifth straight year in terms of sales of new and existing homes based on the momentum that has developed so far this year.

The strong sales have been propelled by continued low mortgage rates that have occurred despite the fact that the Federal Reserve has been gradually raising the short-term interest rates it controls in an effort to make sure that inflation does not get out of hand.

However, the Fed's continued rate increases — a 10th quarter-point hike is expected in August — seem to be finally have an impact on long-term rates. A nationwide survey by Freddie Mac found that the 30-year mortgage increased last week for the second straight week, rising to 5.66 percent.